COMMERCIAL BANK MANAGEMENT
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ASSESSMENTS
1 Participation 10%
2 Mid-term Exam 15%
3 Group Assignment 15%
4 Final Exam 60%
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Commercial Bank Management
CHAPTER 1
INTRODUCTION TO BANKING AND FINANCIAL SERVICES
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Learning Objectives
• Identify the roles of financial service-providers play in the economy.
• Identify the services financial service-providers offer to the public
• Examine how and why the banking industry and the financial services marketplace as a
whole is rapidly changing
• Identify the different types of organizations used in banking and financial services
industry
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Chapter 1: Introduction to banking and financial services
1 1. An overview of commercial banks
1.1. Definition and roles of commercial banks
1.2. Types of banks
1.3. Types of banking services
2 2 The organization and structure of commercial banking industry
2.1. The organization of the commercial banking industry
2.2. The organizational structure of a commercial bank
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1. An Overview of Commercial Banks
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1.1. Definition and roles of commercial banks
Could you name some commercial bank in Vietnam?
How many commercial banks in Vietnam?
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1.1. Definition of commercial banks
• Definition by functions it serves
o Banks are involved in transferring funds from savers to borrowers (financial intermediation)
& paying for goods and services
Or
o A bank is a financial intermediary whose core activity is to provide loans to borrowers and to
collect deposits from savers
• Definition by services offered to customers
o Banks accept deposits, make commercial loans, offer trust services,
manage cash, etc.
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1.1. Definition of commercial banks
• Definition by legal basis (in Vietnam)
o Bank is a credit institution permitted to conduct all banking activities and other related
business operations.
o "Non-bank credit institution" is a credit institution permitted to engage in some
banking activities as its regular business, but not permitted to receive deposits from
individuals and to provide payment services.
o "Banking activities" are monetary business activities and banking services, the regular
operation of which is the receipt of deposits and use of that to extend credits, provide
payment services
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1.1. Definition of commercial banks
• Financial service competitors of banks
o Savings associations o Investment banks
o Credit unions o Finance companies
o Money market funds o Financial holding companies
o Mutual funds (investment companies) o Life and property-casualty insurance
o Hedge funds companies
o Security brokers and dealers o Fintech companies
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1.1. Role of commercial banks
• Commercial banks and the economy
o Banks are the primary source of credit for most small businesses and many individuals
o Banks are the major repository of public savings
o Banks are the principal operator of payment system.
o Banks are the primary conduit for monetary policy
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1.1. Roles of commercial banks
• Financial intermediation process
Figure 1: Flows of Funds Through the Financial System
(Source: Mishkin, 2022)
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1.1. Roles of commercial banks
• Saver’s deposits and loans to borrowers have different characteristics
o Deposits are relatively small, less risky, and highly liquid
o Loans are relatively larger, riskier, and illiquid
• Banks bridge this gap by performing their roles:
o Size transformation
o Maturity transformation
o Risk transformation
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1.1. Roles of commercial banks
Saver
• Size transformation 1
o In direct finance, transaction costs, information
Borrower
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costs, and monitoring costs are expensive
o By standardising contracts and monitoring process, Saver Pooled
banks reduce cost per customers (i.e., economies
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deposits
Borrower
of scale) 2
Saver
3,
Saver
4, etc
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1.1. Roles of commercial banks
• Maturity transformation
10-year loan to a borrower
o Covert short-term deposits into long-term
loans.
3-year deposit of saver 1
o However, this conversion creates mismatch
between banks’ assets (e.g., loans) and 3-year deposit of saver 2
liabilities (e.g., deposits) Liquidity risk
4-year deposit of saver 3
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1.1. Roles of commercial banks
• Risk transformation
o Savers want to minimise risk and take their money back safely
o Borrowers may want to borrow money and invest in risky projects
• Banks transform risk by:
o Loan diversification
o Diversifying investments (i.e., other investments besides lending)
o Pooling and manage risks more effectively (i.e., hedging; screening and monitoring
borrowers; holding risk capital and provisions to absorb losses).
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1.2. Types of Banks
• Commercial banks
o The major form and largest type of banks in most economy
o Some of them are owned by shareholders and publicly listed on the stock exchange. Some
of them are privately owned.
o Main providers of credit and payment mechanism to household and corporate sector.
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1.2. Types of Banks
• Saving banks
o Similar to commercial banks in many aspects, but being traditionally owned by their
depositors (rather than shareholders).
o Focus on offering savings accounts, allowing customers to safely store their money while
earning a modest amount of interest on their balances
o Saving banks focus on retail customers and small businesses.
o Over time, saving banks are becoming more similar to commercial banks
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1.2. Types of Banks
• Cooperative banks
o Cooperative banks are owned and controlled by their customers, who are also known as
members.
o Cooperative banks focus on retail customers and small businesses.
o Cooperative banks focus on meeting the financial needs of their members and often
prioritize community and regional development and social responsibility.
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1.2. Types of Banks
• Building society
o Similar to cooperative banks, building societies are owned and controlled by their members,
who are typically individuals with savings.
o Common in the United Kingdom, Australia, and South Africa.
o Focus primarily on retail deposit-taking and mortgage lending
• Credit union
o Similar to cooperative banks, credit unions are owned and controlled by their members.
o Members deposit their savings, earn interests. Then, loans are made to other members
o They are not driven by profit motives and aim to serve the financial needs of their members.
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1.2. Types of Banks
• Finance houses
o Ownership structure can be similar to commercial banks
o Provide loans to individuals and companies, and a wide
range of other services such as leasing and factoring.
o Do not take deposits and raise funds by issuing money
market and capital market instruments.
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1.3. Types of banking and services
The types of banking can be classified based on various factors such as their target customers
and the services they offer.
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1.3. Types of banking and services
• Retail or personal banking
o Focuses on providing financial services to individuals and small businesses
o Transactions are large volume, low value
o Mostly domestic
o Offering services such as savings accounts, personal loans, mortgages, and credit cards.
• Private banking
o Provision of high-quality financial and other services to wealthy clients, including
individuals and their families.
o Offering personal banking services and up-market investment-related services
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1.3. Types of banking and services
• Corporate banking
o Primarily serve businesses, corporations, and large institutions.
o Transactions are smaller volume, but large value per transaction.
o Both domestic and international focus.
o May be classified into different categories based on customers’ size.
• Investment banking
o Helping companies and governments raise funds in the capital market by underwriting
securities issuance.
o Providing advisory services on merger and acquisitions (M&As) and corporate restructuring.
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1.3. Types of banking and services
Traditional services offered by banks
1) Carrying out currency exchange
2) Discounting commercial notes and making business loans
3) Offering savings deposits
4) Safekeeping of valuables
5) Supporting government activities with credit
6) Offering checking accounts
7) Offering trust services
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1.3. Types of banking and services
Traditional services offered by banks
1) Carrying out currency exchange
o Starting from early days of banks, bank trade one form of currency to another in
return for a service fee.
o Become more complicated in the global financial market
o Be provided by large and well-experienced banks
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1.3. Types of banking and services
Traditional services offered by banks
2) Discounting commercial notes and making business loans
o Discounting commercial notes/making loans to merchants based on accounts
receivable
o Making direct loans for purchasing inventories of goods (short-term) or for
constructing new facilities (long-term)
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1.3. Types of banking and services
Traditional services offered by banks
2) Discounting commercial notes and making business loans
Sell Discounting
commercial notes
Commercial paper/ notes
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1.3. Types of banking and services
Traditional services offered by banks
3) Offering savings deposits
o Savings deposits are the earliest and major source of fund for making loan
o Compose of many types different in maturity, form of currency, interest, etc.
o Be the most stable funding source
o Deposit is subject to reserve requirement and insurance
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1.3. Types of banking and services
Traditional services offered by banks
4) Safekeeping of valuables
o Keep gold and other valuables of customers in secure vaults in return for fee
o Start since the old days of banks in the Middle Ages
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1.3. Types of banking and services
Traditional services offered by banks
5) Supporting government with credit
o Banks in Europe during the Industrial Revolution and in America during the
Revolutionary War had to purchase government bonds with a portion of deposits.
o The custom continues in the modern world
o Banks use government bond as a shelter of liquidity risk and a source of revenue
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1.3. Types of banking and services
Traditional services offered by banks
6) Offering checking accounts (demand deposits)
o Demand deposits permit depositors to write draft/cheque for payment of goods
and services
o Be one of the most important offerings of the industry
o Service is provided by not only banks but also credit unions, savings associations, etc.
o Today the service is extended to the internet with the use of smart cards
o Provide banks with cheap source of fund.
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1.3. Types of banking and services
Traditional services offered by banks
7) Offering trust services
o Banks manage financial affairs and property of individuals and firms in return for
fee
o In property management, banks acts as a trustee for wills, managing the deceased
customer’s estate,…
o In commercial trust department, bank manages pension plan for businesses and
acts as an agent issuing stocks and bonds.
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1.3. Types of banking and services
WHAT ARE THE OTHER BANKING SERVICES?
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1.3. Types of banking and services
1.2.2 More recent services offered by banks
8) Granting consumer loans
9) Providing financial advice
10) Managing cash
11) Offering equipment leasing
12) Making venture capital loans
13) Selling insurance policies
14) Selling retirement plans
15) Dealing in securities: brokerage and investment banking services
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1.3. Types of banking and services
More recent services offered by banks
8) Granting consumer loans
o By early 20th century, banks started lending consumers given the heavy competition
for business deposits and loans
o The trend has increased rapidly after the World War 2
o Other current competitors for the consumer credit accounts are credit unions and
credit card companies.
o The service bears high risk but returns high earnings.
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1.3. Types of banking and services
More recent services offered by banks
9) Providing financial advice
o Banks gains good reputation for understanding and experience in the financial
market
o Customers ask for advice, particularly in credit utilization, saving or investing funds
o Services provided are plentiful including financial plan preparation, marketing
opportunity consultation, fund seeking, investment options, etc.
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1.3. Types of banking and services
More recent services offered by banks
10) Managing cash
o Bank handle cash collection and disbursement for firms, invest temporary cash
surpluses
o Service is expanded to individuals and firms
o Bank earns not only fee, but also low-cost fund in demand deposit accounts
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1.3. Types of banking and services
More recent services offered by banks
11) Offering equipment leasing
Bank/Lessor
Equipment
Firm/Lessee
Vendor
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1.3. Types of banking and services
More recent services offered by banks
12) Making venture capital loans
o Finance the start-up cost of new
companies
o Implement through a venture capital
firm because of added risk
o The venture capital firm raise fund from
investors looking for high profit
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1.3. Types of banking and services
More recent services offered by banks
13) Selling insurance policies
o Insurance policies are contracts in which insurers (i.e., banks) agree to protect or
reimburse customers’ losses and damages in exchange for a fee (i.e., premiums)
o Bank sell insurance policies through acquiring control of insurance companies
o Bank can gain high earning in the high-risk insurance industry
o Bank possess privileges over independent insurer in terms of customers, branches,
system, etc.
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1.3. Types of banking and services
More recent services offered by banks
14) Selling retirement plans
o Bank actively involves in managing retirement plan of businesses make available to
employees
o Incoming fund is invested to wisely selected securities ensuring acceptable risk and
return
o Bank also is in charge of dispensing payment to retired or disabled employees.
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1.3. Types of banking and services
More recent services offered by banks
15) Dealing in securities
o Bank provides security brokerage service and security underwriting
o Bank offer mutual funds, annuities and other investment products with clear
consultation to customers regarding higher expected yields and risk
o Bank temporarily buy stocks of large corporation aiding new business launching or
company expansion by offering merchant banking services
o Bank acts as risk intermediation providing customer with risk hedging tools (e.g. swap,
option, future contract) offered by themselves or from third party
o Services are provided through affiliated securities firms or insurance companies.
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2. The organization and structure of
banking and the financial services industry
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2.1 The organization of commercial banking industry
Unit banking Branch banking
• Offer all services from one office • Offer full range of services from
• New banks are generally unit banks several locations
until can grow and attract more • Each branch has its own management
resources team with limited decision-making
ability.
• Some functions are highly centralized,
while others are decentralized.
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2.1 The organization of commercial banking industry
The Branch Banking Organization
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2.1 The organization of commercial banking industry
What are the reasons behind branching’s growth?
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2.1 The organization of commercial banking industry
What are the advantages and disadvantages of branch banking?
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2.1 The organization of commercial banking industry
Advantages of Branch banking Disadvantages of Branch banking
• Increased convenience for customers because • Larger banks buying out smaller institutions.
more services are available at every branch. This may result in lower banking competition.
• Branching areas tend to have more offices per • Some service fees may be higher in branching
person, making it easier and cheaper for areas, possibly because larger banks have better
customers to access banking services. information and expertise to realize the true
costs of services, leading to higher fees for
• Potential reduction in transaction costs for customers. because larger banks have
customers due to the proximity of branches.
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2.1 The organization of commercial banking industry
Electronic branching
• Electronic branches include websites offering Internet
banking services, automated teller machines (ATMs)
and ATM networks dispensing cash and accepting deposits,
point-of-sale (POS) terminals in stores and shopping
centers to facilitate payment for goods and services, and
personal computers and call-center systems connecting
the customer to his or her financial institution.
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2.1 The organization of commercial banking industry
What are the advantages and disadvantages of electronic branching?
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2.1 The organization of commercial banking industry
Bank holding companies (BHCs)
• A corporation chartered for the purpose of holding the stock of at least one banks,
often along with other businesses
• Must get approval from federal reserve board to become a registered BHC
• Under terms of BHCs Act in 1956, control of a bank is assumed when 25% or more
of the stock is owned
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2.1 The organization of commercial banking industry
Bank holding companies
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2.1 The organization of commercial banking industry
Bank holding companies (BHCs)
• Structure of bank holding company
BANK HOLDING COMPANIES
Bank Non-bank Subsidiaries
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2.1 The organization of commercial banking industry
Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
▪ Finance Companies ▪ Investment Banking Firms
▪ Mortgage Companies ▪ Trust Companies
▪ Data Processing Companies ▪ Credit Card Companies
▪ Factoring Companies ▪ Leasing Companies
▪ Security Brokerage Firms ▪ Insurance Companies and Agencies
▪ Financial Advising ▪ Real Estate Services
▪ Credit Insurance Underwriters ▪ Savings Associations
▪ Merchant Banking
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2.1 The organization of commercial banking industry
Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
▪ Finance Companies:
+ Lend funds to businesses and households
+ Unlike a bank, a finance company does not receive cash deposits from clients,
nor does it provide some other services common to banks, such as checking
accounts.
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2.1 The organization of commercial banking industry
Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
▪ Mortgage Companies: provide ST credit to improve real property for residential
or commercial use
▪ Data Processing Companies: provide computer processing
services and information transmission
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2.1 The organization of commercial banking industry
Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
▪ Factoring Companies: purchase accounts receivable from
business in exchange for supplying temporary financing
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2.1 The organization of commercial banking industry
Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
▪ Security Brokerage Firms: execute customer buy and sell orders for securities, foreign
exchange, futures, and option contracts.
▪ Financial Advising: advise institutions and high-net-worth individuals on managing
assets, mergers, reorganizations, raising capital, and feasibility studies.
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2.1 The organization of commercial banking industry
Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
▪ Credit insurance underwriters: supply insurance coverage to customers borrowing
money to guarantee repayment of a loan
▪ Merchant banking: invest in corporate stock as well as loan money to help finance
the start of new ventures or to support the expansion of existing business
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2.1 The organization of commercial banking industry
Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
▪ Investment banking firms: purchase new government and municipal bonds and
corporate stocks and bonds from issuers and offer these securities to buyers.
▪ Trust companies: manage and care for the property of businesses, individuals and
nonprofit organizations.
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2.1 The organization of commercial banking industry
Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
▪ Credit card companies: provide short-term credit to individuals and businesses in order
to support retail trade.
▪ Leasing companies: purchase and lease asset for business and individuals needing use
of these assets
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2.1 The organization of commercial banking industry
Bank holding companies (BHCs)
• Nonbank subsidiaries of BHCs
▪ Insurance companies and agencies: sell or underwrite insurance policies to those
seeking risk protection
▪ Real estate services: supply real eastate appraisals, arrange for the financing of real
eastate projects, and broker properties
▪ Saving associations: offer saving deposit plans and housing-related credit,
predominantly to individuals and families.
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2.1 The organization of commercial banking industry
Bank holding companies (BHCs)
• Bank subsidiaries
o Profits and losses of each subsidiary impact parent bank
o Parent company’s net income is typically derived from dividends, interest,
management fees from equity in subsidiaries, and interest paid on holding
company debt.
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2.1 The organization of commercial banking industry
Bank holding companies (BHCs)
⮚ What are the advantages and disadvantages of holding companies?
Advantages Disadvantages
- Greater efficiency, more services - Reduce competition
- Lower probability of - High turnover of bank personnel
organizational failure compared to and the lack of personalized service
independent banks - Delays in service when local office
- Higher and more stable profits. managers are forced to refer
questions to the home office.
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2.1 The organization of commercial banking industry
Bank holding companies (BHCs)
⮚ What are the reasons for the growth of BHCs?
✔ Geographic Diversification
✔ Product Line Diversification
✔ Tax Sheltering
✔ Double Leveraging
✔ Source of Strength
✔ A Way Around Regulatory Restrictions
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2.1 The organization of commercial banking industry
Financial holding companies (FHCs)
• Financial holding company is a special type of holding company that regulated under the
Gramm-Leach-Bliley Act of 1999
• FHCs can engage in financial activities not permitted in a bank or bank holding company
• FHCs are defined as a special type of holding company that may offer the broadest range
of financial services, including dealing in and underwriting securities and selling and
underwriting insurance.
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2.1 The organization of commercial banking industry
Financial holding companies (FHCs)
• List of activities offered may expand as regulators decide what services are
‘compatible’ with banking
• Each affiliated financial firm has its own capital and management and its own
profit or loss
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2.1 The organization of commercial banking industry
Financial holding companies (FHCs)
Figure 4: Structure of Financial holding companies (FHCs)
Financial Holding
Company
Bank Holding Securities Insurance Thrift Holding Real Estate
Company Subsidiaries Subsidiary Company Subsidiary
Banking Thrift Subsidiaries
Nonbank
Company Company and Service
Subsidiaries
Companies
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2.1 The organization of commercial banking industry
Financial holding companies (FHCs)
Example:
• Citigroup is a multinational banking group, formed through the merger of Citicorp and
Travelers Insurance, including a variety of companies ranging from trade credit to consumer
support, brokerage to insurance.
• Citigroup is headquartered in New York with parent company Citibank.
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2.1 The organization of commercial banking industry
Financial holding companies (FHCs)
Example: MB with the model of a multi-purpose financial group
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2.2 Internal organization of banking firm
• The great differences in size across the have led to marked differences in the way
banks and other service providers are organized internally and in the variety of
financial services each institution sells in the markets it chooses to serve.
• Internal organization of banking form is divided into two types:
⮚ Community Banks and other community-oriented financial firms
⮚ Larger banks – Money center or wholesale banks
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2.2 Internal organization of banking firm
Community Banks and other community-oriented financial firms
• Community banks devote principally to the markets for smaller, locally based deposits and
loans, is also often referred to as a retail bank.
• Average size is $470 million (FDIC, 2020)
• Community banks are significantly affected by the health of local economy
• They tend to have limited opportunities for advancement
• But they generally know their customers well
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2.2 Internal organization of banking firm
Community Banks and other community-oriented financial firms
• Community banks’ Figure 3: Organizational chart for smaller community bank
organizational chart is not
complicated
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2.2 Internal organization of banking firm
Larger banks – Money center or wholesale banks
• Generally, money center or wholesale banks are multi-billion Dollar company.
• Wholesale banks serve different markets with many different services.
• They are better able to withstand risks of fluctuating economy.
• They are able to raise large amounts of capital at relatively low costs.
• Organizational chart is much more complex.
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2.2 Internal organization of banking firm
Larger banks – Money center or wholesale banks
Figure 4: Organizational chart for a Money center or wholesale bank
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Q&A session
Thank you for listening!
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